City academics respond to the 2018 Spring Statement

Academics from the School of Mathematics, Computer Science & Engineering and Cass Business School have provided analysis of the 2018 Spring Statement announced on Tuesday 13th March by the Chancellor of the Exchequer, Philip Hammond.

While the Chancellor presented a modest Spring Statement, with no new tax or spending measures, he did announce a series of consultations on future policies on several topics, including: How online platforms can help their users to pay the right amount of tax; the future of cash and digital payments; a tax reduction for the least polluting vans to "help the great British white van driver go green"; and a call for evidence "on whether the use of non-agricultural red diesel tax relief contributes to poor air quality in urban areas".

Online payments and the future of cash
and digital payments

Dr Tarek Besold, Lecturer in Data Science in the Department of Computer Science

The move to assist online platforms in making sure that VAT for online sales reaches the Treasury is one that  fits perfectly into the current general debate regarding stronger regulation of online and digital markets.

With the GDPR imminently coming into force, and several European countries taking active steps to establish proper taxation. of, among other things, major internet companies and other economic players in the digital economy, this new effort provides a clear sign that the regulatory environments are adapting to the changes effected by globalisation and the technological advances of the last years.

Even more broadly speaking, both on a national and an international level, there appears to be recognition of the huge role digital technology and the corresponding business models are playing for the economy and the financial underpinnings of society.

With regard to a consultation on cash and digital payments, Dr Besold added:

"Paying large amounts of money by digital payment (e.g., bank transfer, credit card, or private service providers like PayPal) instead of cash is for many people the preferred option. Still, there is a counter-movement including people who are aware of their digital footprint and the data trace each digital payment leaves behind. On the other hand, it is precisely these data traces which make it possible to detect and follow illegitimate money flows and help, for instance, in the fight against money laundering and other criminal activities. If the government is willing to step in and assist in the creation of a generally accessible and affordable digital payment ecosystem, this will likely be welcomed."

Pollution and red diesel tax

Professor Keith Pullen, Professor of Energy Systems in the Department of Mechanical Engineering & Aeronautics

Anything to encourage cleaner vehicles is welcome given that London's toxic emissions regularly break EU limits. Research suggests that up to 10,000 premature deaths occur due to air pollution in our capital city. The use of delivery vans is on the increase due to the growth in on-line purchasing and these vans tend to use diesel, hence a consultation on this topic is particularly welcome. Red diesel carries a lower amount of duty that standard diesel so its use is strictly limited. The use of diesel to power vehicles in urban areas is detrimental to air quality, particularly nitric oxide and nitrogen dioxide - so the investigation is welcomed.

Enterprise Investment Scheme

Professor Meziane Lasfer is Professor of Finance at Cass Business School.

He comments on the proposed new Enterprise Investment Scheme (EIS) fund structure offering investors a dividend tax exemption of between five to seven years outlined in the Spring Statement.

The statement specifies that dividends are exempt if they are paid by 'knowledge-intensive' companies which:

1. Have spent at least 15 per cent of operating costs on Research and Development or innovation in one of the three years preceding investment or 10 per cent in each of the preceding three years;
2. Where shareholders have kept their holdings after a fixed holding period.

Professor Lasfer said this measure is very unlikely to work in practice for a number of reasons:

1. These knowledge intensive companies are by definition growth firms which need to reinvest their earnings, and probably to recur to costly external funding in the form of debt and equity, to cover their heavy capital expenditures;
2. They are unlikely to have distributable reserves as they will be making losses;
3. Shareholders would not push such companies to disgorge cash for fear of investments in negative net present value projects as they will suffer from agency conflicts;
4. Such companies will not need to signal to the market their true value as the market is more likely to value them properly or to overvalue them.

Professor Lasfer said:

“Overall, while the measure appears to be intuitive, it is not likely to work in practice. At the outset, it may be dangerous as it may provide short-term investors to push the knowledge intensive companies to pay cash dividends, just for the sake of claiming the tax benefits, at the expense of investments in growth opportunities.

"This will be counterintuitive and will lead such high growth firms to be short-termists. The Chancellor could have, perhaps suggested that the dividends can be paid only if such firms have reached their maturity stage, but this could precipitate them to cut on R&D investments and growth opportunities. Overall, it is better not to play on market imperfections, such as taxes, to affect the decisions made by companies; let companies and shareholders decide on whether to pay dividends or retain earnings and when is it a good timing to start returning cash to investors.”